RCM on purchases from unregistered supplier under GST

Before coming to the main issue of this article, we would first discuss “What is RCM under GST” so that the readers may have better understanding of the article.

RCM stands for Reverse Charge Mechanism

Normally under GST, the supplier of goods or services is liable to pay GST on supply of goods or services. But, in some cases, the liability to pay GST has been cast upon the recipient of goods or services in the GST laws. This mechanism is known as “Reverse Charge Mechanism”. The definition of ‘Reverse Charge Mechanism’ has been given below:

Section- 2(98) of CGST Act, 2017

‘Reverse Charge’: - the liability to pay tax by the recipient of the supply of goods or services or both instead of the supplier of such goods or services or both under section 9(3) or 9(4) of CGST Act or under section 5(3) or 5(4) of IGST Act.

Section-9(4) of CGST Act, 2017 (corresponding section- 5(4) of IGST Act) has been a matter of worry for every businessman since introduction of GST in India on 1^st July, 2017. Initially, Section-9(4) provided for levy of GST from recipient of goods or services under reverse charge if he procures such goods or services from an unregistered supplier. Further, section 24 of the CGST Act, 2017 provides that a person who is required to pay tax under reverse charge shall be required to register under GST Act compulsorily irrespective of the threshold limit of turnover. This has an impact that either the registered taxpayers would have stopped procuring goods from unregistered business entities or they would have forced them to register under GST so as to avoid RCM provisions. Thus, the RCM provisions of section 9(4) could have severe setback to small and marginal businesses in India.  
 

Looking into the hardships arising due to section 9(4), the Central Government issued an Exemption Notification No. 8/2017- CT dated 28^th June 2017. This notification was effective from 1^st July, 2017. This notification exempted supplies of goods or services or both received by a registered person from any unregistered person from applicability of section-9(4) but subject to limit of Rs. 5,000 per day. Thus, if a registered person is receiving supplies of goods or services or both from unregistered person up to an aggregate amount of Rs. 5,000 per day, he shall not be liable to pay GST under RCM. Please note that this was only a partial exemption. If the supplies from unregistered person is more than Rs. 5,000 in aggregate, the liability to pay GST under RCM was still there.

Notification No. 38/2017- CT dated 13/10/2017

To remove hardships of the business community, the Central Government again came out with another Notification No. 38/2017- Central Tax dated 13/10/2017 (corresponding Notification No. 32/2017- Integrated Tax). This notification allowed a full exemption from RCM on supplies received from unregistered persons. Thus, the capping of Rs. 5,000 per day was removed. However, the notification mentioned that this exemption shall be restricted only till 31^st March 2018. Thus, it meant that no RCM shall be applicable u/s 9(4) w.e.f. 13^th October 2017 till 31^st March, 2018 for procurement of goods or services from an unregistered supplier.
The exemption was further extended till 3oth June, 2018, then to 30^th September, 2018 and finally till 30^th September, 2019 through various notifications referred below: -

Notification No. 10/2018- CT (Rate) dated 23/03/2018 

Notification No. 12/2018- CT (Rate) dated 29/06/2018 

Notification No. 22/2018- CT (Rate) dated 06/08/2018 

The corresponding notification were also issued under IGST Act as follows: - Not. No. 11/2018- IT (Rate), Not. No. 13/2018- IT (Rate), Not. No. 23/2018- IT (Rate).

The above analysis is summarized below in tabular form for your ease: -

However, Section- 9(4) of CGST Act (corresponding section 5(4) of IGST Act) has been now amended and substituted to have effect from 01/02/2019 by a new provision as below: -

Section-9(4): “The Government may, on recommendations of the Council, by notification, specify a class of registered persons who shall, in respect of supply of specified categories of goods or services or both received from an unregistered supplier, pay the tax on reverse charge basis as the recipient of such supply of good or services or both, and all the provisions of this Act shall apply to such recipient as if he is the person liable for paying the tax in relation to such supply of goods or services or both.”

The reading of substituted provision clearly shows that now RCM u/s 9(4) is not applicable on each and every supply from unregistered suppliers. Rather, it will be applicable only to those supplies of goods and services which have been notified by the Central Government. It should also be noted that after amendment in section 9(4) of CGST Act, the Exemption Notification No. 8/2017 stands rescinded. In exercise of the powers u/s 9(4), the Central Government has issued Notification No. 7/2019- CT (Rate) dated 29^th March, 2019 which is effective from 01^st April, 2019. Through this notification, the Central Government has notified the supplies of goods or services received from unregistered suppliers where the recipient is a ‘promoter’ of a real estate project.

 Notification No. 7/2019- CT (Rate) dated 29th March, 2019 

Thus, at present, section 9(4) will have application only in relation to specified supplies from unregistered suppliers received by ‘promoter’ in respect of real estate projects according to the above notification. In crux, RCM is not applicable u/s 9(4) of CGST Act, 2017 on receipt of goods or services by a registered person from an unregistered supplier (except as notified in Notification No. 7/2019)

Related Posts:

List of Goods and Services under RCM in GST